The best savings account for emergency savings must be readily accessible, protected by the FSCS and have as good a rate of interest as possible. Here are the 5 best accounts I’ve found for UK financial independence campaigners to put their emergency savings fund into in 2021. The one you pick depends on your circumstances but this should give you food for thought.
What is the FSCS and why does it matter?
The UK has something called the Financial Services Compensation Scheme (FSCS). This protection covers:
- £85,000 per person per bank;
- £170,000 for a joint account per bank; or
- £1million in temporary deposits (up to 6 months) per bank.
This means that if the bank holding your money goes bust, you’ll definitely get this much money back. In theory, wehn a bank goes bust, money held on customer deposits is protected under trust law. However, banks have been known to mess this up, so the FSCS is like free insurance on your cash.
Emergency savings funds have to be there in the emergency, so the accounts listed below have to be included in the FSCS scheme.
The best emergency savings accounts have FSCS protection.
Cash ISA or regular account?
Cash ISAs pay interest that’s tax free. If you read my post on investing in ISAs and Pensions, you’ll know that I prefer to use the ISA limit for investments. For financial independence in the UK, you’d ideally want to maximise the £20,000 ISA limit for investments (e.g. a Stocks and Shares ISA).
That said, if you’re saving way under £20,000 in a year, you might consider a cash ISA account for an emergency savings fund. You can just leave it in there, the allowance doesn’t roll over each year. The problem will be that if you draw the cash in an emergency, topping it up will use part of that ISA allowance in the year you start topping it back up. Less than ideal.
There’s also a tax reason why having an emergency savings fund in a regular savings account might not be a problem for most people anyway.
Personal savings tax allowance
In the UK, a basic rate taxpayer can make up to £1,000 in interest from savings accounts before being taxed. Interest rates are pretty low, so you could easily hold £50,000 in non-ISA cash savings without breaking this benchmark at today’s interest rates. For higher rate taxpayers, the allowance drops to £500. If you’re lucky enough to be an additional rate taxpayer, there’s no personal savings allowance for you – but do you really care anymore?
The best savings account will depend on your tax circumstances
But in 2021 it MIGHT just BE a regular savings account.
Locked-in savings: deposit accounts
Some types of savings account offer better rates of interest if you agree to lock up your savings for a fixed period, or if you have a long notice period for withdrawal.
The problem with these for emergency savings is that you can’t draw the cash in an emergency without paying money for the privilege. If emergency strikes, can you really wait 90 days? You could pay an initial emergency using a credit card until the cash is unlocked, but after 30 days you’ll definitely be paying credit card interest on the bill. For this reason, I discounted savings accounts where the notice period was longer than 30 days.
Emergency savings need to be accessed in an emergency. The best savings account for emergency savings will let you do this.
For emergency cash, 30 days is probably the maximum you can wait.
Premium bonds?
You might consider the premium bonds scheme from National Savings and Investments here, too.
Premium bonds don’t pay interest. Instead, each £25 bond is one lottery ticket in a prize draw that gets played every month. Gambling prizes are tax free in the UK, so anything you win is tax free. There is no guarantee of winning, but the cash deposits can be returned to you with as little as 2 days’ notice if you request it by internet.
The premium bonds website gives an effective interest rate of 1%. You might win nothing, you might win the £1million prize; the average rate though comes to 1%.
You can only buy or sell premium bonds in multiples of £25, so it’s not ideal for everyone. As the withdrawal has a notice period, you would still need to cover the cash-in period for emergency use. If premium bonds were to be combined with a credit card or the another savings pot, this might still be a good option.
Best Cash ISAs
| Name | Interest rate (nominal) | Notice period | Online | Phone | Branch |
|---|---|---|---|---|---|
| Kent Reliance Easy Access Cash ISA | 0.45% on min. £1000 | Instant | Yes | Yes | Yes |
| Cynergy Bank Online Cash ISA | 0.41% | Instant | Yes | No | No |
| Marcus by Goldman Sachs | 0.4% | Instant | Yes | Limited | No |
| Nationwide One Year Triple Access Cash ISA | 0.4% | Instant | Yes | No | No |
| Al Rayan Bank Instant Access Cash ISA | 0.35%* | Instant | Yes | Yes | Yes |
There are things that you should know about before you decide that one of these cash ISAs is the best savings account for your emergency fund.
- Kent Reliance ISA: this account only pays 0.45% if you keep £1,000 or more in the account. It’s only 0.1% on smaller balances.
- Nationwide ISA: this account only lets you withdraw 3 times a year. OK for an emergency savings fund, less good if you actually plan to use the account for general cash savings.
- Flexible ISAs? None of these accounts are “flexible” ISAs. You’re capped on deposits and you can’t replace anything you take out without using some of your £20k ISA allowance.
Best instant access savings accounts
| Name | Interest rate (nominal) | Notice period | Online | Phone | Branch |
|---|---|---|---|---|---|
| Atom Instant Saver | 0.5% | Instant | Yes (phone app) | Yes (phone app) | No |
| Marcus by Goldman Sachs | 0.4% | Instant | Yes | Limited | No |
| Cynergy Bank Online Easy Access Account | 0.4% (0.3% after 12 months) | Instant | Yes | No | No |
| RCI Bank Freedom Savings Account | 0.4% | Instant | Yes | No | No |
As with the cash ISAs, there are some things you should know before you decide that one of these could be the best savings account for your emergency fund:
- Tax: any interest that you earn that goes above the personal savings allowance for the year needs to be declared to the tax man. Interest is billed as income, i.e. like your pay, but without national insurance contributions.
- Atom Bank: This is an interesting concept. Atom operates entirely through a mobile phone app. If you don’t trust your mobile, this might not be the one for you!
- Online only: the best regular savings accounts shown here are all online only. That wouldn’t bother me, but it might bother you.
Conclusions
For interest, game theory and average interest rates suggests that premium bonds might actually be the answer for the best savings account for emergency funds, combined with some kind of immediate cash or credit. If you’re achieving the average rate of 1%, you’re golden. However, the risk on the interest being paid and the delay of payment makes them less suitable for everyone.
Atom Bank was a surprise to me. Before writing this post I hadn’t heard of them, but their interest rate is surprisingly good. I do most of my banking and web browsing on my phone already, so this might be an account I consider using in the future.
There was very little benefit in having cash savings in an ISA versus having them in a regular savings account. I’m a basic rate taxpayer (with aspirations of being a higher-rate taxpayer), so I still have a personal savings allowance. I’d rather use the ISA allowance to cover investments, so the best savings account for me is a regular savings account.
One other point: all of these accounts are making a loss in real terms. If inflation averages around 2% for the year, the best savings accounts are already costing you 1.4% to 1.5% of your cash wealth in real terms each year. If you’d like to know more, see my post on how money is made.
